2016 (6) TMI 1282 - AT - Income Tax

Tribunal directs adjustments on transfer pricing, royalty payments, Section 80IB, CENVAT credit, interest charges.

The Tribunal partly allowed both appeals, directing the AO to verify and make necessary adjustments on various issues. The Tribunal emphasized the need ... Transfer Pricing Adjustment - determination of arm’s length price - royalty payment - Held that:- The assessee is importing basically the breeder seeds and with the aid of technical know-how of its AE and assists in further developing seeds at the facilities located in various parts of the country. Thus, to say that there is no benefit to the assessee from such proprietary information, trademarks, technical know-how would not be correct. Even in third party situation, proprietary rights, information and license to use trademarks and know-how is provided or make available then it would not be free of cost. There is always a price which needs to be computed under the principles of “Arm’s Length Price”. Contention of the TPO as well as direction of the DRP that royalty payment has to be treated as “Nil” cannot be justified in the wake of not only the “technical collaboration agreement” but also the actual conduct of the parties and the assessee who has earned huge returns during carrying out its activity by exploiting these intangibles. The third party data have been rejected on the ground that, the agreement relates to the year 1995, whereas the payment has been made in 2006 by the assessee to its AE. However, we fail to understand if the terms of the agreement are still in force and has not been terminated then how the year of agreement will make a difference. If a similar payment has been made to the third party in this year, then, if other attributes of CUP are fulfilled then same has to be considered for the comparability analysis to benchmark the ALP of the payment. What is required to be seen is, whether the terms and conditions of the agreement with the third party and the terms and conditions of the agreement with the AE are similar or not. If they are similar, then definitely there is a situation of internal CUP, unless some material differences is shown between the two agreements or there is change in the facts from year 1995 to this year or any other criteria of significance. We find that the Tribunal in respect of ‘license manufacturing segment’ has restored back the matter to the file of the TPO for benchmarking the same by using CUP method. On the same principle, we are also in agreement that CUP method should be applied for benchmarking this transaction. Accordingly, we restore this issue to the file of the TPO/AO to examine the terms and conditions of the agreements with the third party and whether such terms are still relevant for the year under consideration and also the terms and conditions entered into by the assessee with its AE. Deduction of “other income” from the amount of profits eligible for deduction under section 80IB - Held that:- So far as the interest on employee loan is concerned, it cannot be held that same has direct or proximate connection with the business of the industrial undertaking. Moreover, this issue has been decided against by the Tribunal in assessee’s own case as admitted by the Ld. Counsel, therefore, so far as interest on employee loan at ₹ 28,523/-, the same has righty been disallowed by the AO. As regards the ‘other interest income’, no submissions have been made before us, therefore, on this score also we uphold the order of the AO denying the deduction claimed under section 80IB. As regards the ‘sale of scrap’, the Ld. Counsel before us has filed the details of miscellaneous income which is on account of sale of scraps. Since these evidences were not filed before the authorities below, therefore, same needs to be verified by the AO and accordingly, we are setting aside this issue for examining the same. Set off of losses of 80IB units against the profits of non 80IB units for working out the eligible profits under section 80IB - Held that:- We hold that each undertaking or unit is to be treated as independent and separate unit and it is those industrial undertaking which have a profit or gain are to be considered for computing the deduction. The loss making industrial undertaking would not come into picture at all. Thus respectfully following the aforesaid decision, we allow the claim of the assessee. Addition on account of closing stock on account of unutilized CENVAT credit - Held that:- if the addition of ₹ 19,00,63,130/- made to the closing stock on account of unutilized CENVAT credit is to be sustained, then corresponding adjustment should be made to the opening stock, purchases and sales and this proposition is covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for the AY 2005-06. Thus, respectfully following the aforesaid decision, which in turn is based on the decision of Hon’ble Bombay High Court in the case of Mahalaxmi Glass Works Pvt. Ltd (2009 (4) TMI 182 - BOMBAY HIGH COURT ), we decide this issue accordingly and restore the matter to the file of the AO with similar direction. Disallowance of site restoration expenses - Held that:- Here the case of the assessee before us is that it has itself disallowed the provision and now it is being claimed on actual basis. We accept this contention that once it is undisputed fact that the assessee’s claim has been disallowed in the earlier years then, actual expenditure incurred in this year has to be allowed. Before us, the Ld. Counsel has also pointed out that, in AY 2009- 10, a similar expense on actual basis has been allowed. Accordingly, we direct the AO to allow the actual expenditure incurred during this year on site restoration cost. Accordingly, ground no. 5 is treated as allowed. Non-granting of TDS credit/short-deduction of TDS - Held that:- We direct the AO to verify the contention of the assessee and grant the credit after verification. Issues Involved:1. Transfer pricing adjustments.2. Deduction under Section 80IB.3. Addition to closing stock on account of unutilized CENVAT credit.4. Disallowance of certain expenses.5. Charging of interest under Sections 234B, 234C, and 234D.6. Other corporate tax issues.Detailed Analysis:1. Transfer Pricing Adjustments:- Purchase of Raw Material:The assessee's international transactions for the purchase of raw materials were scrutinized. The TPO rejected Sudarshan Chemicals as a comparable due to its loss-making status and under-utilization of capacity. The DRP upheld this rejection. The Tribunal noted that merely being loss-making is not a valid reason for exclusion if the comparable satisfies functional analysis. The Tribunal directed the AO to verify the impact of reduced pricing of the product 'Topik' on profitability and make necessary adjustments.- Royalty Payments:The assessee paid royalties to its AE for technical know-how and trademarks. The TPO disallowed these payments, stating no benefit was received. The DRP confirmed this. The Tribunal held that the royalty payment cannot be nil and directed the TPO to use CUP for benchmarking. Additionally, the Tribunal noted that if the operating profit margin in the seed business is higher than comparable companies, no adjustment should be made.2. Deduction under Section 80IB:- Reduction of Other Income:The AO reduced other income from profits eligible for deduction under Section 80IB. The Tribunal upheld the disallowance of interest on employee loans but remanded the issue of sale of scrap for verification.- Set-off of Losses:The AO set off losses of one 80IB unit against profits of another. The Tribunal, following the Delhi High Court's decision in Sona Koyo Steering Systems Ltd., held that each unit should be treated independently, and loss-making units should not affect the deduction of profit-making units.3. Addition to Closing Stock on Account of Unutilized CENVAT Credit:- The AO added unutilized CENVAT credit to the closing stock. The Tribunal directed the AO to make corresponding adjustments to the opening stock, purchases, and sales, following the Bombay High Court's decision in Mahalaxmi Glass Works Pvt. Ltd.4. Disallowance of Certain Expenses:- Repairs and Maintenance:The AO disallowed certain repairs and maintenance expenses, treating them as capital in nature. The Tribunal dismissed these grounds as not pressed by the assessee.- Site Restoration Expenses:The AO did not allow actual site restoration expenses. The Tribunal directed the AO to allow the actual expenses incurred, noting that similar expenses were allowed in subsequent years.5. Charging of Interest:- Under Sections 234B, 234C, and 234D:The AO charged interest under Sections 234B, 234C, and 234D. The Tribunal directed the AO to recompute the interest based on the outcome of the appeal and proper credit of TDS.6. Other Corporate Tax Issues:- Depreciation on Software Expenses:The AO did not grant depreciation on software expenses disallowed in the previous year. The Tribunal directed the AO to grant the depreciation.- Non-granting of TDS Credit:The Tribunal directed the AO to verify and grant the correct credit of TDS.Conclusion:Both appeals were partly allowed for statistical purposes, with directions for verification and recomputation by the AO on various issues.